Second factor: laws in countries governing the manner intercompany transactions may be priced

Transfer Pricing Method

Cost-based transfer price

Based on actual or budgeted variable and fixed production costs. Includes profit margin for the seller

Problems: which measure of cost to use and inefficiencies in one unit may be transferred to other units.

6

Market-based transfer price

Transfer price is based on price would have been charged to unrelated parties or determined by reference to sales of similar products

7

Negotiated Price

Negotiation between buyer and seller

Needs to have external market for the items being transferred. Disadvantage: time-consuming and the agreed price shows the manager's negotiation ability instead of ability to control costs and generate profit

8

Decentralization Advantages and Disadvanges

_Allowing local managers to respond quickly to changes_Dividing large, complex problems into managerial pieces_Motivating local managers

Disadvantage: managers make decision for self-interest

9

Goal Congruence

Accounting and control system should be designed to provide incentives for local managers to make decisions that consistent with corporate goals